MGT 8803 Financial Accounting UPDATED
Exam Questions and CORRECT Answers
Proprietorship - CORRECT ANSWER - A form of business organization with one owner who
takes all the risks and all the profits. Unlimited liability, but the business doesn't pay taxes.
Partnership - CORRECT ANSWER - A business owned by two or more people who share its
risks and rewards. Unlimited liability, but the business doesn't pay taxes.
Corporation - CORRECT ANSWER - A business owned by stockholders who share in its
profits but are not personally responsible for its debts. Double taxation.
Going Concern Assumption - CORRECT ANSWER - The assumption that the company will
continue in operation for the foreseeable future.
Periodicity Assumption - CORRECT ANSWER - An assumption that the life of a business
can be divided into artificial time periods and that useful reports covering those periods can be
prepared for the business.
Materiality Assumption - CORRECT ANSWER - The only information that needs to be
disclosed in financial statements is that which will be useful for those who use the financial
statements to make decisions.
GAAP - CORRECT ANSWER - Generally Accepted Accounting Principles. The standards
and rules that accountants follow while recording and reporting financial activities.
SEC - CORRECT ANSWER - Securities and Exchange Commission
FASB - CORRECT ANSWER - Financial Accounting Standards Board, is the private sector
body given the primary responsibility to work out the detailed rules that become GAAP.
, IFRS - CORRECT ANSWER - International Financial Reporting Standards. Opposition from
US companies to convert to this.
GAAP vs. Tax Accounting - CORRECT ANSWER - Tax accounting focuses on IRS
reporting.
Qualities of Financial Statements - CORRECT ANSWER - Understandability, timeliness, full
disclosure, comparability (over time and with other companies), objectivity (accuracy not
applicable because judgement needed), decision relevance.
Three Required Financial Statements - CORRECT ANSWER - 1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
Balance Sheet - CORRECT ANSWER - Measures financial position at a point in time.
Includes assets, liabilities, and owner's equity - what company has and what it owes.
Liabilities - CORRECT ANSWER - The creditor's claims to the assets of the business
Assets - CORRECT ANSWER - Resources or rights to receive resources.
Types are physical, intangible, and legal (right to receive).
Owner's Equity - CORRECT ANSWER - The owner's claims to the assets of the business
Accounting Equation - CORRECT ANSWER - Assets = Liabilities + Owner's Equity
(Resources = Creditors' claims)
Goodwill calculation - CORRECT ANSWER - paid for the company
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Exam Questions and CORRECT Answers
Proprietorship - CORRECT ANSWER - A form of business organization with one owner who
takes all the risks and all the profits. Unlimited liability, but the business doesn't pay taxes.
Partnership - CORRECT ANSWER - A business owned by two or more people who share its
risks and rewards. Unlimited liability, but the business doesn't pay taxes.
Corporation - CORRECT ANSWER - A business owned by stockholders who share in its
profits but are not personally responsible for its debts. Double taxation.
Going Concern Assumption - CORRECT ANSWER - The assumption that the company will
continue in operation for the foreseeable future.
Periodicity Assumption - CORRECT ANSWER - An assumption that the life of a business
can be divided into artificial time periods and that useful reports covering those periods can be
prepared for the business.
Materiality Assumption - CORRECT ANSWER - The only information that needs to be
disclosed in financial statements is that which will be useful for those who use the financial
statements to make decisions.
GAAP - CORRECT ANSWER - Generally Accepted Accounting Principles. The standards
and rules that accountants follow while recording and reporting financial activities.
SEC - CORRECT ANSWER - Securities and Exchange Commission
FASB - CORRECT ANSWER - Financial Accounting Standards Board, is the private sector
body given the primary responsibility to work out the detailed rules that become GAAP.
, IFRS - CORRECT ANSWER - International Financial Reporting Standards. Opposition from
US companies to convert to this.
GAAP vs. Tax Accounting - CORRECT ANSWER - Tax accounting focuses on IRS
reporting.
Qualities of Financial Statements - CORRECT ANSWER - Understandability, timeliness, full
disclosure, comparability (over time and with other companies), objectivity (accuracy not
applicable because judgement needed), decision relevance.
Three Required Financial Statements - CORRECT ANSWER - 1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
Balance Sheet - CORRECT ANSWER - Measures financial position at a point in time.
Includes assets, liabilities, and owner's equity - what company has and what it owes.
Liabilities - CORRECT ANSWER - The creditor's claims to the assets of the business
Assets - CORRECT ANSWER - Resources or rights to receive resources.
Types are physical, intangible, and legal (right to receive).
Owner's Equity - CORRECT ANSWER - The owner's claims to the assets of the business
Accounting Equation - CORRECT ANSWER - Assets = Liabilities + Owner's Equity
(Resources = Creditors' claims)
Goodwill calculation - CORRECT ANSWER - paid for the company
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